Jones Apparel CEO Faces
Few Choices to Boost Its Stock Price;
Selling Barneys Is an Option

The chief executive of
Jones Apparel Group Inc.,
a former investment banker and financial whiz, has spent his five-year tenure trying to boost the company's fortunes through acquisitions, cost-cutting and overhauling mature labels like Anne Klein and Jones New York.

But now, faced with a stagnant stock price, department-store consolidation and a downturn in the moderate-apparel sector, Mr. Boneparth has an ace left to play: selling the $5 billion company's top-performing asset, the Barneys New York chain of luxury department stores that he engineered the purchase of in 2004. Jones is expected to pursue a sale, though Barneys isn't officially on the market yet, people familiar with the process say.

Jones Apparel CEO Peter Boneparth may sell off Barneys New York, the retailer that is the company's top-performing asset.

At the time of the Barneys acquisition, industry watchers scratched their heads. A luxury-department-store chain seemed completely out of place with Jones's portfolio of moderate and better department-store brands, such as Nine West, Gloria Vanderbilt and Jones New York. But amid a luxury-goods boom, Barneys has thrived, and in retrospect the acquisition has proven to be one of Mr. Boneparth's most astute moves. Still, the growing Barneys chain is a capital-intensive business with lower margins than Jones's core wholesaling units.

In selling Barneys after three years, Jones is behaving more like a private-equity fund than an apparel wholesaler. The company could use the cash infusion from selling Barneys to buy back stock, invest in other brands or even acquire new ones. Despite Barneys's growth in recent years, analysts have had a hard time valuing the stores because Jones doesn't break out their results.

Selling Barneys, however, would leave Jones even more exposed to problems plaguing suppliers of traditional department stores at a time when its executive suite is in turmoil.

Two weeks ago, Mr. Boneparth fired Heather Pech, who had been chief executive of the retail division for less than a year, for not turning around the beleaguered unit fast enough. And Chief Financial Officer Thimios Sotos resigned in March after the board refused his request for a pay increase, according to people familiar with the negotiations. Two board members -- former
J.C. Penney
Co. and
Federated Department Stores Inc.
Chairman Allen Questrom and retired banking executive Anthony Scarpa -- have announced plans to leave the board when their terms end in June.

The 47-year-old Mr. Boneparth himself is in a precarious position. Last month, he and the company said they had both decided not to extend his contract when it expires in two years. While the contract may be renegotiated if earnings improve, one retail-industry recruiter says board pressure may force Mr. Boneparth to depart as soon as June.

Mr. Boneparth's relationship with the board is already tense. He favored increasing Mr. Sotos's pay and was angry when the board rejected his proposal, the people familiar with the negotiations say. Reached over the phone, Mr. Sotos declined to comment. And when Jones reported a net loss of $144.1 million for 2006, the board's compensation committee decided not to give Mr. Boneparth a bonus.

Mr. Boneparth's boldest move to date, attempting a sale of the entire company last year to a private-equity firm in a red-hot market for such deals, didn't pan out. After five months, the company wound up pulling the plug on the auction because Jones failed to generate sufficiently high bids from players like Bain Capital and TPG, formerly Texas Pacific Group.

Jones was headed for trouble before Mr. Boneparth became CEO in 2002. The company spent $1.4 billion for its Nine West shoe division, which lost its footing amid competition from specialty-apparel retailers that began introducing shoe lines. The company also had inked a deal with
Polo Ralph Lauren Corp.
to make apparel under the Lauren, Ralph and Polo Jeans labels, but the arrangement unraveled when Polo invoked a clause allowing it to get out of the pact early. Following a court battle, Jones sold the licenses back to Polo. It was a severe blow: The labels generated some $900 million a year in revenue for Jones.

The shrinking of department-store chains exacerbates Jones's situation. When Federated bought May Department Stores in 2005, Jones' moderately priced Norton McNaughton and L.E.I. labels were especially hard hit. At the same time, middle market retailers like J.C. Penney and
Kohl's Corp.
have been ramping up their own moderate brands and demanding that specific brands are sold exclusively at one chain.

Mr. Boneparth has won applause from customers and analysts for efforts to turn around Jones's "better" department-store brands, such as Jones New York and Anne Klein. Both have seen sales and margin improvements, despite the fact that Federated has closed 90 stores since buying May.

Barneys, which Jones purchased for $400 million, could probably fetch more than double that amount in today's private-equity market, according to Merrill Lynch analyst Virginia Genereux, who has a "neutral" rating on the stock.

But a Barneys sale would leave the company even more vulnerable to the sagging moderately priced apparel sector. "The solution is to continue to execute on it, not to sell it," says Ted O'Connor, a portfolio manager at Cooke & Bieler LP, a Philadelphia- based investment firm that owns 4.7 million Jones shares, according to FactSet Research Systems Inc.